People won’t take jobs because Democrats gave them too much money, according to Senate Minority Leader Mitch McConnell (R-Ky.).

“You’ve got a lot of people sitting on the sidelines because, frankly, they’re low on the ground at the moment,” McConnell said. told the Paducah Area Chamber of Commerce in his home state this week. “What we have to hope is that once they run out of money, they start to conclude that working is better than not working.”

McConnell’s statement may have been a standard right-wing grievance, but the idea that the American people currently have too much purchasing power also happens to be the guiding principle of the federal government‘s most important economic policy then. trying to curb runaway inflation.

Federal Reserve officials disagree with Republicans that Democratic stimulus spending alone caused inflation. They have continually cited supply issues as a major contributor – although they have been careful to avoid playing arbiter in the debate over why prices have risen.

But the Fed can’t do anything about the COVID lockdowns in China or the war in Ukraine. The central bank can only suppress demand by raising interest rates, and it is doing so at the fastest rate in decades. Higher interest rates make borrowing more expensive, which means individuals and businesses are likely to take out fewer loans and spend less money. Reduced consumer spending means fewer jobs.

“Our goal, really, is to get inflation down to 2% while the labor market remains strong,” Federal Reserve Chairman Jerome Powell said at a news conference last month. “I think what’s becoming clearer is that a lot of factors that we don’t control are going to play a very big role in deciding whether it’s possible or not.”

“By slowing down demand too aggressively, [the Federal Reserve] could very well cause an economic downturn and lay off a lot of people and impoverish people, impoverish families, even though they are already struggling with rising prices.

— Jin Woo Chung, senior economist at the progressive think tank Groundwork Collaborative

Some economic indicators suggest that the labor market may already be cooling. On Friday, the Labor Department reported strong but slightly slower job and wage growth in June than in previous months. Heidi Shierholz, president of the liberal Institute for Economic Policy, said “this deceleration in wage growth means the Fed does not need further interest rate increases to contain inflation.”

Powell and other Fed officials are using bureaucratic language to mask the potential collateral damage of their efforts to lower prices and restore “balance” between supply and demand, both for products and for workers. . At their meeting last month, Fed policymakers said they expected “appropriate monetary policy tightening to play a central role in helping to address imbalances in the labor market,” according to meeting notes released this week.

In a tight labor market with more job openings than workers to fill them, restoring balance could simply mean fewer job openings. Or it could mean more mass layoffs. Either way, the Fed expects rising interest rates to push the national unemployment rate up about half a percentage point to 4.1% over the next two years. Many economists think the Fed’s forecast underestimates the likelihood of more intense pain.

“By slowing down demand too aggressively, they could very well cause an economic slowdown and lay off a lot of people and make people poorer, families poorer, even though they are already struggling with rising prices,” Jin Woo said. Chung, a senior economist at the progressive think tank Groundwork Collaborative, said in an interview.

Chung believes that because supply issues are contributing to inflation – a recent analysis by economists from one of the Fed’s regional banks found that supply accounted for at least half of the price increases – the government shouldn’t react solely by tackling demand. Instead, Chung said the Biden administration and Congress should target price increases and corporate profits.

A small number of Democrats have begun to question the Fed’s strategy given the prevalence of supply issues. During a hearing last month, Sen. Elizabeth Warren (D-Mass.) asked Powell whether higher interest rates would directly lower gas or food prices, and Powell acknowledged that it would not.

“Right now, the Fed has no control over the major drivers of rising prices, but the Fed can slow demand by laying off a lot of people and making families poorer,” Warren said. “You know what’s worse than high inflation and low unemployment? It’s high inflation and a recession with millions out of work.

Sen. Jon Tester (D-Mont.) asked Powell if high interest rates would cause a recession.

“It’s not the intended outcome at all, but it’s definitely a possibility,” Powell said.

The central bank’s goal is to change people’s perceptions about the direction of inflation, said Erica Groshen, senior economics adviser at Cornell University School of Industrial and Labor Relations.

“They are trying to impress on markets and individuals that they are not going to be content with very high inflation for long, that they are prepared to slow the economy if necessary to get closer to inflation targets,” says Groshen.

If individuals and businesses expect inflation to continue, their behavior could actually make it worse – for example, if demand for workers rises just to offset potential future increases in the cost of living. The Fed closely monitors inflation expectations; its own investigations show that since last year, household expectations have started to soar.

“They don’t want to cause a recession, but to some extent people have to believe that they’re ready to cause a recession if they have to,” Groshen said. “When you have very high inflation expectations, you really need a recession to bring them down.”

McConnell said it’s a shame Democrats caused inflation by passing the US bailout in early 2021, a bill that raised the value of unemployment benefits and handed out $1,400 stimulus checks $. (Senate Republicans previously backed two major stimulus bills that sent people checks.)

“That decision last year based on the party line to drop $2 trillion on the economy was a gargantuan mistake,” he said.

As for McConnell’s claim that workers turn down jobs because they’re full of money, Matt Darling, employment policy researcher at the Niskanen Center, a centrist think tank, pointed out that the employment ratio -population for prime-age workers this year has reached pre-pandemic levels (although in June it was slightly below its 2020 peak). JPMorgan Chase bank said current account balances have remained high since the start of the pandemic; a separate measure of the amount of money people are saving has fallen to pre-pandemic levels.

Darling scoffed at the idea that people were still sitting around because they got a stimulus check in April 2021.

“The idea that there’s a bunch of people going, ‘Oh, I’ve got $2,000, I’m going to surf this for 18 months’ — that’s really unbelievable,” Darling said.


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